One of the best justifications for owning a home, at least for financial reasons, is the tax savings that result from deducting mortgage interest and real estate property taxes. Under the current tax code, mortgage interest on first and second homes is generally deductible as long as these loans total less than $1.1 million.
To deduct property taxes and the interest paid on your mortgage, you must itemize deductions rather than take the standard deduction. For many homeowners, the combined deductions for mortgage interest and property taxes easily exceed the standard deduction.
As a home buyer, you may also be able to deduct fees charged by the lender and closing costs. Contact a tax advisor for details on how you can take advantage of homeownership tax savings.
Other advantages of owning a home include:
You can accumulate home equity. You can borrow against the equity built up in your home to finance necessities such as a college education, vacation, new car, etc. Since the interest on a mortgage is usually low, borrowing money against your home can be very sound. The interest on home equity loans is usually tax deductible, too.
Glossary of Terms
Abstract of Title
A condensed history of the title to a particular piece of real estate showing, in chronological sequence, matters such as conveyances, liens, and encumbrances which have been recorded against the title in the office of the register of deeds or other public recording place.
Adjustable Rate Mortgage
A mortgage with a fluctuating interest rate usually limited to one adjustment each year. There are a set number of maximum increases over the life of the loan, with the fluctuating rate based on a national index.
Acceptance occurs when all buyers and sellers have signed an identical copy of the offer, including signature on separate but identical copies of the offer.
Additional material attached to and made part of a document.
Something that significantly and adversely affects the value of the property; significantly reduces the structural integrity of improvements to real estate; presents a health risk to occupants of the property; or information that indicates that a party to a transaction is not able to or does not intend to meet the obligations under a contract made concerning a transaction.
A person who is authorized by another to act on their behalf.
A document used to change the term of a contract.
An estimate or opinion of value.
A mineral fiber which has been used in a variety of ways within the home, but generally as an insulator around plumbing. Asbestos can be friable or non-friable, and may be hazardous to health.
The determination by the state of the property’s worth, for property tax purposes. Assessed value is usually a percentage of the appraised value.
A financing instrument whose terms are transferable to a party wishing to purchase the property holding the assumable mortgage.
A document which transfers ownership of title.
An agent representing two principals in one transaction. Dual agency is legal in Wisconsin only with informed written consent of both parties to the transaction.
An act that is done honestly.
A person who is receiving an interest in real property.
A person who is conveying an interest in real property.
Two or more persons holding title to real property who are named on the same deed, hold an equal interest which was obtained at the same time, and share an undivided possession of the property. Joint tenants benefit by the “right of survivorship”.
Given when a building does not conform to zoning because of a change in the zoning ordinance. The use of the building will be allowed to continue until the improvements are destroyed or the current use is discontinued.
Notice Relating to the Offer to Purchase
A form used by the parties to a purchase contract whereby one party is unilaterally giving notice to the other party.
An odorless radioactive gas which may enter a home through cracks in the foundation or drains in the floor.
Underground Storage Tank
Tanks used in the storage of fuel or heating oil for noncommercial purposes or consumptive use.
A contract whereby neither party can sue the other for performance. However, an unenforceable contract may be valid between the parties by their mutual agreement.
A lump-sum payment due at the end of a mortgage contract period.
Creates an enforceable contract between the parties. The offer is binding upon both parties only if a copy of the accepted offer is delivered to the party making the offer prior to the date established for binding acceptance.
A failure to perform as promised in a contract.
A person who is licensed to charge a fee to buy, sell, exchange, or lease real property for others.
The business of bringing buyers and seller together in the marketplace.
Buyer Agency Agreement
A written employment agreement that creates an agency relationship between a broker and a buyer. The buyer employs the broker to put forth a reasonable effort to find a property for the buyer to purchase and to negotiate on behalf of the buyer.
The firm that has entered into a buyer agency agreement with the buyer indicating that the broker will be representing the interests of the buyer.
Up front cash or item of value from the potential buyer which indicates their intention to make good on their offer to purchase.
Any claim against a property that may diminish its value.
The excess of a property’s fair market value over the outstanding debts.
Exclusive Right to Sell
An agency agreement giving the listing broker the exclusive right to market the seller’s property. The seller promises to pay a commission to the listing broker if the terms of the contract are fulfilled, except if the buyer is procured by the seller.
The primary residence including the land and building surrounding the main house.
A type of seller financing in which title does not transfer from seller to buyer until the mortgage has been paid in full. Under a land contract the buyer gains equitable title and seller maintains legal title.
An illness caused by a toxic mineral which may be found in the home in paint or water pipes.
A legal right to place a claim or encumbrance on property or have it sold for payment of a debt.
A remedy for breach of contract, which is available only to the seller, whereby he/she retains the buyer’s earnest money as liquidated damages.
The listing broker is the firm that the seller has employed under a listing contract. The listing agent is the agent within the employing firm who actually acquired the listing.
A written employment agreement that creates an agency relationship between a broker and a seller.
The relationship between the loan amount and the selling price.
Offer to Purchase
A promise made, usually by a buyer, to purchase a seller’s property under certain terms.
Option to Purchase
An agreement to keep open, for a set period, an offer to sell or lease real property.
The dollar amount charged by the lender to cover the time and expenses incurred to arrange a loan. The fee covers the lender’s overhead for the processing of the loan throughout the loan term.
A market for the purchase and sale of existing mortgages.
The selling broker is the firm which procured the buyer for a seller. The selling agent is the actual person, within the selling broker’s firm, who actually procured the buyer.
An action brought by a court to force a party to carry out the terms of a contract.
An agent who works under another agent.
Sue for Damages
A remedy for breach of contract whereby a party sues the breaching party for cash damages.
Sue for Specific Performance
A remedy for breach of contract whereby one party to a contract sues the other party to carry out the agreement of the contract.
A contract that contains all of the necessary elements and is enforceable in a court of law.
Grants permission to deviate from a zoning restriction.
An unenforceable contract that lacks legal purpose or essential requirements.
A contract that can be voided by an injured party.
A contract which terminates the rights that the buyer and seller have in a contract for sale.
The person who employs an agent to perform a service on their behalf.
The final act in a real estate transaction, in which all financing is distributed to the parties and rights to the property change from seller to buyer.
Cloud on Title
A claim or encumbrance that would affect or burden an owner’s title to real estate.
A provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding.
Contract for Sale
An agreement between buyer and seller for the sale and purchase of the seller’s property.
A broker, who works in conjunction with another broker in procuring a buyer for the seller’s property.
An offer which essentially terminates a prior offer and states only the new terms to be negotiated.
A person who receives services given on behalf of and for the benefit of a client.
An article that was once personal property but has been so affixed to real estate that it has become real property.
A valuable addition to land such as buildings, sewers, and sidewalks.
Property ownership recognized in Wisconsin that views the married couple as a single unit. It establishes ownership rights and the right to manage and control the property. Marital property is the real and personal property of all married persons.
The price a ready, willing, and able buyer actually pays for a property.
The price at which a property would sell in the open market to a buyer who is under no duress, is not related to the seller, is well-informed about the property and who has been found within a reasonable amount of time.
A title which is free from defects and encumbrances and may be transferred to another party.
Material Adverse Fact
An adverse fact that a party indicates is of such significance or that is generally recognized by a competent licensee as being of such significance to a reasonable party, that it affects the party’s decision to enter into a contract or the terms of a contract.
Mirror Image Offer
An Offer to Purchase that is written at the price and on substantially the terms set forth in the listing. Even if the seller does not accept this offer the broker may be owed a commission.
Any statement of fact by one person to another, either by words or actions, which is not in accordance with the actual facts.
Mixed Marital Property
A combination of both individual and marital property that will always be treated as marital.
Financing instrument used to purchase property, comprised of the mortgage document and mortgage note.
The document pledging real estate as security for the repayment of a debt.
The note is the borrower’s actual promise to repay the loan.
Multiple Counter Proposal
A way for a seller to negotiate with more than one buyer at a time. The seller is not bound to a particular buyer until the seller accepts the buyer’s approval of the multiple counter proposal.
Multiple Listing Service (MLS)
An agreement whereby brokers pool their listings and offer to cooperate and compensate other brokers and in some cases buyer’s brokers.
Personal Property (Personalty)
Property that is portable or unattached to the real estate.
An acronym used to describe a loan payment that includes principal, interest, taxes, and insurance.
Prepaid interest that is collected at closing. This money is used to buydown the interest rate of a mortgage.
Power of Attorney
A written instrument giving a person the authority to act on behalf of another (the principal).
The market where loans generally are originated and sold.
1. One who has permitted or directed another to act for his/her benefit and subject to his/ her direction and control; 2. The amount of money which is borrowed, not including the payment of interest.
Private Mortgage Insurance
An insurance policy written to insure a portion of a mortgage amount for a borrower.
Purchase Money Mortgage
The seller takes a mortgage from the buyer for all or a portion of the purchase price. Seller has equitable title and buyer gets legal title.
Housing constructed prior to 1978, which under the Lead Based Paint Disclosure Law, requires a Lead Based Paint Addendum included with the Offer to Purchase. The exemptions to this law include housing for the elderly, housing for the disabled or 0-bedroom dwelling.
Time is of the Essence
The specified date in the contract by which agreed-upon acts must be completely performed or the non-performing party will breach the contract.
Ownership of real property for a limited time period, usually one week each year.
An insurance policy which protects the insured against loss or defects which may occur in the title.
A state imposed fee on the sale of property. The rate of the transfer fee is 30 cents for each 100 dollars of value.
An area where water is at, near or above the land surface long enough to be capable of supporting aquatic or hydrophytic vegetation.
In Wisconsin, a homebuyer can choose to work with a buyer’s agent or a selling agent. Either way, your agent is a specially trained professional, licensed by the state of Wisconsin, who is obligated by law to treat all parties to a real estate transaction fairly.
If you work with a selling agent, there is no contract between you and the agent, and you are not the agent’s client. You will, however, receive a Broker Disclosure to Customerform that lists the fair treatment duties owed to you and indicates that the selling agent is either an agent of the seller or an agent of the listing broker (subagent).
If you work with a buyer’s agent, you are the buyer’s agent’s client. You and the buyer’s agent sign a WB-36 Exclusive Buyer Agency Agreement that includes a Disclosure of Real Estate Agency. The Disclosure lists the fair treatment duties owed to all parties and the duties owed to you as the client, and indicates that the buyer’s agent is the agent of the buyer.
The buyer’s agent works for the interests of the homebuyer, but also must know how to work with the listing agent. A buyer’s agent can:
Recommend or suggest an offering price or give you an opinion about whether a particular house is priced too high or too low.
Structure the offer and draft offer provisions with the buyer’s best interests in mind.
Recommend and assist the buyer with negotiation strategies for the best price and terms.
Research and disclose information and research a property’s history title and liens so the buyer can make a better informed decision.
Give advice within the scope of the agent’s expertise as a licensed real estate professional.
Shopping for a Home
Once you know how much home you can afford, the next step is to find the right property. A REALTOR® can do advance legwork that will help focus your search so that you see only those homes best suited to your needs. Your REALTOR® will also help you by providing objective information about each property, as well as local community information on utilities, zoning, schools, etc.
The following links might help you.
Home Buying Tips
New home or not so new, it pays to know what to look for in its structure, equipment and surroundings. Though a final assessment can be made by an inspection service company, this checklist can serve as a reminder of some things you should look for in order to make a wise buying decision.
Floors and walls poured concrete. No evidence of water seepage or moisture problems. Minor settling cracks usually not structurally significant.
Termite and wood rot
May require inspection by qualified exterminator for existing and potential problems.
Condition of walls, whether drywall or plaster. Absence of water marks.
Damper in working order, flues to chimney clear.
Hot water system
Type and gallon capacity. How long present unit in service (if older home).
Good water pressure throughout house. Tie-in to local water supply facilities, etc. all in working order. Bathroom and kitchen fixtures in good shape.
Lot and landscaping
Grading level or properly contoured. Trees and shrubs sufficient for needs. Fences, walls, patio and driveway in good condition.
Doors and windows
Easy to open and close (or replace) for storm/screen removal or installation.
Doors or opener in good working order. Sufficient electrical and heating access.
Sump pump for sanitary and foundation draining. Crawl space dry.
Condition of flooring, whether plank or plywood. Solid construction of bridging and joists.
Sufficiently insulated and ventilated.
Type of heat used and minor periodic maintenance required-oil fan motor, lubricate bearings, clean humidifier, replace filters, etc.
Standard house current, number of circuits, outlets and fuses or circuit breakers sufficient for everyday needs.
Appliances and fixtures
Range, refrigerator, dishwater/disposal, laundry facilities, etc. all in working order. Accommodation for gas grill hook-up. Bathroom and kitchen fixtures in good shape.
Type suitable to weather conditions, need for any periodic maintenance (painting or tuck pointing).
Gutters and downspouts in good condition. If older home, how long have shingles been in use? Chimney flashing tightly caulked.
The process of buying a home starts with determining your buying power. A REALTOR® can help you determine how much home you can afford. Often a REALTOR® can suggest ways to accrue the down payment and explain alternative financing methods, as well as refer you to lenders best qualified to help you. In addition to knowing the local money market, a REALTOR® can tell you what personal and financial data to take with you when you apply for a loan.
1. What is a Mortgage Loan?
When you want to buy new clothes, you simply go to the store, make your selection and pay – cash or credit. Buying a new home, because of the price tag, is a lot different. Few people have the ability to go shopping, choose a house and pay cash.
Rather, most people pay a cash down payment on their new home and finance the remainder of the purchase price with a mortgage loan. A mortgage requires you to pledge your home as the lender’s security for repayment of your loan.
Since financing is a key issue in most sales contracts, one of the first things you should do is to figure out how much house you can afford – how large of a mortgage loan you qualify for. Lenders use certain guidelines to determine the mortgage amount they will lend you. The two guidelines used are housing expenses and long-term debt.
Lenders generally say that housing expenses (including mortgage payments, insurance, taxes and special assessments) should not exceed 25 percent to 28 percent of your gross monthly income. Long-term debt is usually defined as monthly expenses extending more than 10 months into the future and should not exceed 33 percent to 36 percent of your gross monthly income. These numbers may vary according to loan type, credit and downpayment. Many loans today allow up to 33 percent for the housing to income ratio and 38% for the total debt to income ratio.
A wide selection of mortgages is available to you in the marketplace. Your challenge is to select the loan terms that are most favorable to you.
2. Types of Mortgage Loans
Although you may hear about many different types of mortgage loans, they all belong to two families: conventional and government . These loans are available through various mortgage lenders.
The major advantage of fixed rate mortgages is that you know what your housing costs are for the life of the loan. Some fixed-rate mortgages you will probably hear about are:
30-year fixed-rate mortgage
This is the easiest fixed-rate loan to qualify for. It keeps your monthly mortgage payments low by making your payments over a longer period of time. However, the longer the term of the loan, the more total interest you will pay. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low. This loan also provides maximum interest deduction for tax purposes.
15-year fixed-rate mortgage
The 15-year mortgage offers a lower interest rate than a 30-year mortgage. This type of shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the mortgage more quickly, you also build up equity in your home soon. However, the monthly payments you make will cost you more than those on a 30-year mortgage.
With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that when interest rates go up, your monthly mortgage payments may go up, too. On the other hand, when interest rates go down, your monthly mortgage payments may also go down.
ARMS are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage, you can qualify for a larger loan. You may want to consider an ARM if you are confident your income will be enough to comfortably handle any increase in payments, if you plan to move in a few years, or if you need a lower initial rate to afford to buy the home that you want.
Before applying for an ARM, find out how high your monthly payments could go – the “worst-case scenario.” An ARM has two caps on how large an interest rate increase is permitted.
One cap sets the most that your interest rate can go up during each adjustment period. For example, your ARM may cap the yearly interest rate increases at 2 percent, meaning that the adjusted interest rate can never be more than 2 percent higher than the previous year.
The other cap sets the maximum total amount of all interest adjustments over the life of the loan. For example, your ARM may have a lifetime rate cap of 6 percent, meaning that the highest adjusted interest rate you can ever be required to pay is no more than 6 percent above the original rate.
Finally, one important thing to know when comparing ARMs is that the interest rate changes on an ARM are tied to a financial index. A financial index is a published number or percentage. Lenders use this index to measure the difference between what they are making on their investment in the mortgage and what they could be making on other types of investments. The most popular financial index is based on the rate of return on a one-year a Treasury bill (T-bill).
To obtain these loans, you apply through a lender that is approved to handle them.
With a FHA loan, you can purchase a home with very low down payments (from 3 to 5 percent of the FHA appraisal value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given county. They are available in both fixed-rate or adjustable-rate mortgage plans.
Rural development loans offer home loans with no down payment requirements to low- and moderate-income persons who live in rural areas or small towns.
WHEDA’s HOME program features low down payments and below-market interest rates. And with HOME, your rate is fixed for the term of your loan – from 15 to 30 years. You must meet certain requirements in order to be eligible for a HOME loan.
3. Shopping for Your Best Mortgage Deal
As soon as the sales contract is signed, obtaining financing for the new home becomes key for most buyers.
When most people think about choosing a mortgage lender, they think about finding the lowest rate. Bear in mind that mortgage packages consist of more than interest rates. They consist of a quoted rate, plus origination fees, discount points (prepaid interest assessed by the lender at settlement) and other fees, plus a full range of terms including adjustable versus fixed-rates, low down payment versus high down payment, the presence or absence of prepayment penalties, and many other features.
In addition to the financial considerations, you will want a lender you can trust, a lender you can work with effectively, and a lender who offers a wide range of mortgage loan products. Here are three steps that can help you shop for a mortgage.
Build a List of Lenders
Talk with your real estate agent. Real estate professionals are normally in the best position to learn about financing opportunities in the marketplace. Lenders regularly call agents to alert them to financing packages. Talk to people you know who have bought or refinanced a home recently. Check the newspaper’s real estate or business section. Look in the Yellow Pages under “Mortgages.” Finally, check out Web sites for lenders in your area. Many sites include information on home loan programs, as well as publish rates.
Talk to a Loan Officer
Call or visit the lenders on your list. Get a feel for what it will be like to work with them and how they approach your needs. You might want to ask for references – recent home buyers like yourself – and talk to them. Here are some key questions to ask lenders:
→ What type of mortgage loan products do you offer?
→ What are your rates?
→ What are the points?
→ What is your rate lock period?
→ What are your closing costs?
→ How long will it take to process my mortgage application?
→ How long before I know if I have been approved for the loan?
→ What documents do I have to provide?
→ What costs am I expected to pay?
→ Is a deposit required to make a loan application?
Compare Rates for Similar Loans
Among the things you’ll want to discuss with prospective lenders are the rates they offer on mortgages. When comparing rates between lenders, be sure the rates are for comparable loans and rate lock periods. Remember to include fees and other costs so you’re comparing apples to apples.
4. Applying for a Mortgage Loan
The loan application process, with its countless loan documents, unfamiliar terminology and uncertainty, can be complicated and stressful. However, if you understand the steps required to apply for a mortgage loan, much of the stress can be avoided.
The first thing you should do (after choosing your REALTOR– even before you start shopping for a house – is choose a lender and get pre-qualified for a mortgage loan. Pre-qualification provides you with a ballpark estimate of how large a mortgage you can afford. This will help you to focus your shopping on homes that fit into your price range.
To get pre-qualified, set up a meeting with the lender. The lender will ask you many questions regarding your income, debts and assets, as well as explain your financing options and the loan amount you can qualify for. Many buyers choose to get pre-approved, as well, at this time. A loan pre-approval gives you a stronger bargaining chip when you are negotiating with the seller because you have basically already been approved for a mortgage loan.
Once you have an accepted offer to purchase on a home, your next step is to set up a loan application meeting with your lender. During your loan application meeting, the loan officer will fill out, or help you fill out, the loan application form. The application asks for information on the property you are buying, terms of the purchase contract and your employment and financial history.
You can complete the loan application process much more easily and accurately if you prepare for it ahead of time. When you call your lender to arrange the loan application meeting, make sure to ask the lender what information and supporting materials you will need to have with you to complete the application.
After you have submitted your loan application, your loan officer gives your file to the loan processing department where the information is verified and calculations are checked. The loan then passes to the underwriting stage, where the decision to approve or not approve is made.
Once your loan is approved, it moves to the final step in the process – the closing of the transaction. Documents must be signed, fees paid and title transferred. Once the sale is closed, the house – and mortgage – are yours.
5. Home Appraisals
As part of your mortgage loan application, you’ll pay for your lender to order an appraisal on the house that you are buying. Appraisals typically run between $400 and $700. Lenders won’t approve and fund your loan until they establish that the home you are buying is worth the loan amount you are requesting.
An appraisal is an objective, third-party estimate of the current market value of a home, made by a person who has sufficient knowledge and experience to accurately estimate its value. Appraisers use comparable sales and listing data, as well as information about the home being appraised, its neighborhood, community, region and the local and national economy to support their value estimates.
Once the appraisal is complete, be sure to ask your lender for a copy of it. By law you are entitled to a copy of the appraisal.
6. What Happens After You Apply for a Mortgage Loan
For many homebuyers, the period of time between the submission of the loan application and receipt of the lender’s commitment letter is one of uncertainty and concern. However, if you understand the process, waiting for approval will be far less worrisome.
After your loan application has been completed, your lender will begin the work of verifying all the information you’ve provided. This process can take anywhere from one to six weeks, depending on the type of mortgage you choose, whether you are buying a home outside your local community, and other factors. Your loan officer should be able to give you an idea of the processing time for your application.
Within three business days after completing the application, the lender must give you an estimate of your closing costs. It will show costs associated with the loan settlement, such as origination fees, mortgage insurance, title insurance, escrow reserves and hazard insurance.
You’ll also get a statement that shows, among other things, your estimated monthly payment. The total cost of all finance charges on your loan is also shown, stated as an Annual Percentage Rate (APR). The APR represents the dollar amount of finance charges you pay either up front or over the life of the loan, converted to an annual interest rate.
During this “waiting” period, it is important to keep the lines of communication open. You should be accessible if the lender needs additional information or documents during processing. Quick response to lender requests helps keep the process on schedule.
After the lender approves the loan, you will usually receive a commitment letter which sets out the terms of the loan and the length of time for which those terms are offered. You usually must accept the commitment by returning a signed copy to the lender within five to 10 days. The commitment may contain conditions that you will still have to satisfy, so you should read it carefully.
If the lender decides not to approve your loan application, the lender has 30 days from the acceptance of your completed application to notify you. This notification must also include the reasons for rejection.
Once the commitment letter or approval has been received, you are assured the financing you need to complete the purchase of your home and you need to turn your attention to completing the details required for settlement.
Offer and Contracts
Once you find the right home and decide to make and offer to purchase, there are several points for negotiation that should be included in your offer, including price, financing, terms, date of possession, inclusion or exclusion of repairs and furnishings or equipment. The offer to purchase should also provide a period of time for you to complete appropriate inspections and investigations of the property before you are legally bound to complete the purchase.
Your REALTOR® can advise you as to which investigations and inspections are recommended or required. Your REALTOR® can also prepare contracts on your behalf, and offer a general explanation of the contract provisions. The typical contracts that may be involved in a sale include an offer to purchase, counter-offer, addenda and amendments.
The mortgage loan closing (or settlement) is the final step to official ownership of your new house. Even though you have a signed purchase contract and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and the loan is closed.
Every area of the country has its own unique closing customs. Your REALTOR® can guide you through this process and make sure everything flows together smoothly.
At closing, you will sign the mortgage loan documents and pay your closing costs, the seller will execute the deed to the property, and the closing agent will record the necessary instruments to give you legal ownership of the property.
Closing costs vary widely depending on your new home’s price, location and other factors. Overall, you can expect to pay between 1 and 3 percent of the sales price.
As soon as you receive your commitment letter from your lender, you should confirm the actual date of loan closing. Usually your real estate agent, lender and closing agent coordinate a date with you. You want to make sure that closing takes place before your loan commitment expires and before any rate lock agreement expires. The closing date also has to allow adequate time to assemble all of the required documentation.
There are standard documents and exhibits that are commonly required for a loan closing. Some of these will be your responsibility. Some of these will be the responsibility of other parties to the transaction, such as the seller and lender.